Consequences of the aging crisis
Perhaps China’s greatest problem is one of age. Many have talked about the coming consequences of China’s long-standing one-child policy and its effect on an aging population, but the numbers and impact on China’s future economy are staggering.
The IMF already sees a potential labor shortage of more than 100 million workers in the near future as the nation’s working-age population shrinks — a casualty of China’s low birth rate. As Time reports, China’s elderly could grow to more than 30% of the nation’s total population by the 2040s. With China already racing to provide enough benefits to a growing middle class, supporting a surging senior population will be a monumental challenge. Younger Chinese consumers can hardly be expected to pick up the slack in a slower-growth future.
Something has to give, and it will most likely be China’s economic growth. Productivity will be hit as the country ages and a smaller workforce tends to a growing senior demographic — a trend already looming over Asian rival Japan. Japan’s aging population that will tax social-support systems and the workforce paint a bleak picture of what will likely come to China in the future.
Despite all this, China has some trends going for it. Even with its current slowdown, the world’s second-largest economy is growing faster than than 7%, so something as drastic as contraction is unthinkable in the near future unless the hurdles above grow into a wall. China’s technological growth will also help productivity and overall economic growth even as challenges mount. While cheap labor and manufacturing wane, innovation could take their place as a key economic driver in a more educated and wealthy society. Already, innovative firms such as Baidu.com, Inc. (ADR) (NASDAQ:BIDU), the top Chinese search engine that is now the fifth-most-visited Internet destination in the world, have shown promise for China’s economy and investors alike in taking advantage of the technologically developing nation.
Even with those advantages, however, China’s future challenges are significant enough to keep this nation from ascending high enough to flex its economic muscle on a global stage in the coming few decades. If China will ever take up the mantle as the world’s economic leader, it will not be through a leap to the top, but rather through a hard-fought, decades-long struggle as the nation modernizes and progresses.
What’s an investor to do?
China’s growth story has captivated investors lately, although Chinese markets haven’t capitalized on growth. The Hang Seng Index has stayed flat over the past two years, and China’s recent slowdown has kept the index from matching the high-powered markets of the U.S. and Japan. How should China’s impending hurdles affect your investing approach to massive economy?
As with any market, look for strong companies with real lasting power. Tech firms like the aforementioned Baidu.com, Inc. (ADR) (NASDAQ:BIDU) are in a strong position to capitalize on China’s technological development. Chinese Internet users grew 10% last year, swelling to more than 560 million in a trend that will help Baidu.com, Inc. (ADR) (NASDAQ:BIDU) and other online leaders. Furthermore, leading Chinese tech firms have partnered with global leaders to help solidify their leadership as the middle class grows. Internet firm SINA Corp (NASDAQ:SINA) has already established alliances with Apple Inc. (NASDAQ:AAPL) and Alibaba recently — two moves that should help bolster the company’s long-term future by capitalizing on Chinese iOS users and growing advertising revenue at its Weibo.com social-media service.
On the other hand, risky bets become far riskier in China. With transparency already in question in China, investors looking for great companies should stay clear of Chinese stocks without real competitive advantages.
For risk-averse investors, the best way to invest in China may be to buy stock in large multinational firms operating in Asia’s largest economy. Industrial giant Caterpillar Inc. (NYSE:CAT) has recently expanded operations in China as its sales in slower-growth areas such as Europe wane. Caterpillar Inc. (NYSE:CAT) plans to capitalize on the country’s infrastructure investment and urban growth as the company attempts to dig out of its own recent slowdown. While Caterpillar still trails some competitors in the world’s second-largest economy, its commitment to growing its presence across the Pacific — even as the industrial sector continues to lag — is an inviting prospect for investors looking for safer picks in China.
In all, while China is poised to continue its growth story, significant challenges remain that should hinder this country’s rapid ascension to the economic elite. China’s GDP may overtake the U.S.’ in coming years, or it may not. What’s clear is that it will take much more than the world’s top GDP for China’s economy to emerge as a true world leader.
The article Why China’s Surging Economy Is in Trouble originally appeared on Fool.com.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Apple, Baidu, and SINA. The Motley Fool owns shares of Apple and Baidu.
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